Stock analysis: Geox spa - the breathing shoe's corporation - part 2

Let's continue our analysis by looking at the company reclassified cash flow statement:



Cash flow from operations contracted 28,5% to 83,557 m from 116,758 m, mainly due to reduction in other non cash items and an increase/decrease in other current asset/liabilities.

This contraction, coupled with heavy net Cap Ex (94 m - a record for the company) mainly allocated to new store openings (especially flagship stores in key strategic locations), caused the free cash flow to turn negative to -10,74 m from 74 m in 2007.

The negative free cash flow and the 62 m the company payed in dividends had a considerable impact on company's net financial position, which was partially mitigated by the gains in the fair-value of derivative contracts used to hedge against currency fluctuations.

The surplus in the net financial position decreased to 58,2 m from 106,7 m. This actually isn't bad news since keeping a lot of cash for long periods of time without investing it or distributing it destroys value for the shareholders. For 2009 Geox has decided to reduce the Cap Ex to around 45 m and to keep the dividend unchanged in order to maintain a solid financial profile.

The increase in the net operating working capital (NOWC = inventories + accounts payble - accounts receivable) soaked up 42 mln of cash flow. The net revenues/NWC ratio increased to 22,9% from 21,7% , this impacted negatively the ROA. The increase in the ratio is caused by inventories growing more than net revenues:





Looking at the balance sheet we can observe that inventories grew 22,3%, accounts receivable 15,3% and accounts payable 17% against an increase of 16% in sales.

PROFITABILITY:

As a result of reduced profit margins and invested capital expanding more than revenue Geox profitability fell in 2008:

- ROA2008 26% vs ROA2007 32,7%
- ROE2008 27,5% vs ROE2007 34,5%
- OCF2008/PN2008 vs OCF2007/PN2008 32,7% (OCF = operating cash flow)

Although it's slowing due to the recession and it's effects on consumer spending, profitabilty remains on very high levels. In fact high retuns on capital invested and efficient capital allocation is one of the things i like about the company.



As a final consideration we can observe by looking at these figurest that Geox autofinanced it's exceptional growth in the past five years with it's solid cash flows while managing to mantain a solid financial position and good returns on invested capital during the years. This isn't a so common thing in the italian corporation scenery, and is a good testament to the company and it's management.

Stock analysis: Geox spa - the breathing shoe's corporation

Geox spa is one of my favourites blue chips on the Italian stock market. Geox creates, produces, promotes and distributes patented shoe and apparel products all over the world. It operates in the men's, women's and children's classic, casual, sports and fashion business.


Geox main competitive advantages are:

1. Technology: constant focus on the product with the application of innovative and technological solutions developed by Geox and protected by patents.
2. Focus on the consumer: cross-market positioning for products, with a vast range of shoes for men, women and children in the medium to medium/high price range (family brand).
3. Brand recognition: strong recognition of the Geox brand thanks to an effective communication strategy and its identification by the consumer with the "breathing" concept.
4. Internationalization: a growing presence on international markets thanks to easy replication of a business model already tried and tested in Italy.
5. Distribution: a network of monobrand Geox Shops in Italy and abroad which has been developed according to each country's distribution structure and calibrated to the widespread network of multibrand clients. The goal of both networks is to optimize market share and, at the same time, to promote the Geox brand to end-consumers on a consistent basis.
6. Supply chain: a flexible delocalized business model with considerable outsourcing, capable of efficiently managing the production and logistics cycle while the Company maintains control over critical phases of the value chain, so as to ensure product quality and timely deliveries.
   

Geox is the 1st shoe brand in Italy and the 2nd in the world. Since the start of 2008 the company is a member of the S&P/MIB index, the leading blue chip's index for the Italian stock market.

Let's take a look at Geox 2008 results (the images are taken from Geox 2008 financial statements):



Net sales were up 16% thanks to new store openings. Comparable DOS (directly operated stores opened for at least 1 year) sales were up 3%.
The rise in sales was not enough to offset the strong increase in general and administrative expenses, caused mainly by new store openings, especially flagship stores.
As a result EBIT margin contracted to 19,1% from 23,4%.
Net profit margin contracted less to 13,2% from 16% thanks to a lower tax rate (29,2% in 2008 vs 31% in 2007) due to a one time fiscal item.
EBIT and net income were also negatively affected by asset impairments by 2 mln and 5,9 mln respectively. Diluted EPS were 0,45 in 2008 vs 0,48 in 2007, a contraction of 6,25%.

Let's take a closer look at sales:



Geox is trying to further expand it's sales by selling apparel equipped with it's breathing technology in addiction to shoes. Due to it's high growth rate apparel is becoming increasingly more important as a source of revenue for Geox. In 2008 it generated 9,4% of net revenues as opposed to 6,7% in 2007, with a grow rate of 62,5% compared to 12,5% for shoes.

Geox main market is it's home market, Italy, which generated 37,3% of it's sales in 2008. In the last years the company successfully expanded in other European countries like Germany, France, Spain, Austria, in the US and in emerging markets (rest of the world). If you look at past balance sheets you can see than the company is progressively expanding the percentage of revenue generated outside Italy. In 2008 it continued to purse this strategy with important Cap Ex (capital expenditures) - roughly 94 mln euro - committed to opening new DOS (especially flagship stores) all over the world.

As you can see in the image the percentage of sales generated in DOS sales has increased in the last year, increasing to 15,8% from 13,1%, while the percercentage of revenue generated in franchising stores remained stable at 16%.

...to be continued...